massive Roth conversion

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Wild Willie
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massive Roth conversion

Post by Wild Willie » Fri Jul 13, 2018 8:56 am

Had a thought and as my wife always says, "when you have a thought, I start worrying". Wondering if there is any magic bullet anyone knows about regarding converting a $1M+ Tira to Roth's and not get gutted by the IRS? Is there anyway to defer the tax bill other than spacing out the conversion amounts? Then there is the extra Medicare premiums if I have too much taxable income in one year. Just looking for some tips (if there are any).

Silk McCue
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Re: massive Roth conversion

Post by Silk McCue » Fri Jul 13, 2018 9:11 am

There is no magic bullet that would help here. The Federal tax bill would be "devastating" at $300,499 on $1,000,000 Taxable Income and is payable and due in the year the income is recognized.

I used http://www.taxplancalculator.com for this.

Married Filing Jointly Federal Tax Only $1,000,000 taxable income
Tax rates
In $0 - $19050 bracket, you pay 10%. Cost: $1,905
From $19050 - $77400, 12%. Cost: $7,002
From $77400 - $165000, 22%. Cost: $19,272
From $165000 - $315000, 24%. Cost: $36,000
From $315000 - $400000, 32%. Cost: $27,200
From $400000 - $600000, 35%. Cost: $70,000
From $600000 and above, 37%. Cost: $139,120

Total federal tax bill: $300,499

Cheers

Dottie57
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Re: massive Roth conversion

Post by Dottie57 » Fri Jul 13, 2018 9:19 am

Are you retired now? Will you be retired before SS or pension starts? If so, you can do Roth conversions At 12% marginal or even 22% depending on your situation.

Use taxcaster to estimate taxes.

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David Jay
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Re: massive Roth conversion

Post by David Jay » Fri Jul 13, 2018 9:32 am

The entire converted amount shows up as taxable income. You manage the conversion amounts year-by-year to optimize the process. Most people pick a tax bracket and convert to fill the tax bracket. I will be doing inversions to the top of the 12% tax bracket each year between retirement (62) and start of Social Security (70). As Dottie said, depending on your projected future tax brackets, you may choose to go to the top of the 22% tax bracket.

Remember, as the law is currently written, the 22% bracket returns to 25% in 9 years. So even if you think you will be in the 25% bracket after RMDs start, you save 3% on the money converted in the meantime.
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GAAP
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Re: massive Roth conversion

Post by GAAP » Fri Jul 13, 2018 9:39 am

David Jay wrote:
Fri Jul 13, 2018 9:32 am
The entire converted amount shows up as taxable income. You manage the conversion amounts year-by-year to optimize the process. Most people pick a tax bracket and convert to fill the tax bracket. I will be doing inversions to the top of the 12% tax bracket each year between retirement (62) and start of Social Security (70). As Dottie said, depending on your projected future tax brackets, you may choose to go to the top of the 22% tax bracket.

Remember, as the law is currently written, the 22% bracket returns to 25% in 9 years. So even if you think you will be in the 25% bracket after RMDs start, you save 3% on the money converted in the meantime.
And that also means that conversions to the top of the 24% bracket can make a lot of sense now -- you're still saving 1%, and by doing it sooner, you reduce the total taxable balance.

Another consideration would be whether or not you wish to make Roth contributions, since the phase-out limits would limit how much you can convert.

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One Ping
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Re: massive Roth conversion

Post by One Ping » Fri Jul 13, 2018 10:14 am

GAAP wrote:
Fri Jul 13, 2018 9:39 am
David Jay wrote:
Fri Jul 13, 2018 9:32 am
Remember, as the law is currently written, the 22% bracket returns to 25% in 9 years.
And that also means that conversions to the top of the 24% bracket can make a lot of sense now -- you're still saving 1%, and by doing it sooner, you reduce the total taxable balance.
If you convert to the top of the 24% bracket, once you are are on Medicare, be careful to consider what happens to your Medicare Part A and D payments. Above a MAGI of $170K your payments go up and can result in an increase of about $1,300 a year ... sort of a stealth tax.
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BigFoot48
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Re: massive Roth conversion

Post by BigFoot48 » Fri Jul 13, 2018 10:22 am

Put your numbers in the Retiree Portfolio Model to get an estimate of what the gutting might be during conversions, or after 70 during RMD years. It now includes an estimate of the impact of high income on Medicare premiums.
Retired | Two-time in top-10 in Bogleheads S&P500 contest; 12-time loser

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Hayden
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Re: massive Roth conversion

Post by Hayden » Fri Jul 13, 2018 10:24 am

Also, remember that NIIT kicks in at $250,000 for married. Personally, I am converting up to the point where NIIT starts.

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One Ping
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Re: massive Roth conversion

Post by One Ping » Fri Jul 13, 2018 10:26 am

Hayden wrote:
Fri Jul 13, 2018 10:24 am
Also, remember that NIIT kicks in at $250,000 for married. Personally, I am converting up to the point where NIIT starts.
Not to NIIT pick but what is NIIT.
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Horsefly
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Re: massive Roth conversion

Post by Horsefly » Fri Jul 13, 2018 10:36 am

One Ping wrote:
Fri Jul 13, 2018 10:26 am
Hayden wrote:
Fri Jul 13, 2018 10:24 am
Also, remember that NIIT kicks in at $250,000 for married. Personally, I am converting up to the point where NIIT starts.
Not to NIIT pick but what is NIIT.
NIIT = Net Investment Income Tax

However, I thought that IRA distributions where exempt from NIIT. I need to go look....

EDIT: As far as I can tell, IRA distributions are NOT subject to NIIT.

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Hayden
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Re: massive Roth conversion

Post by Hayden » Fri Jul 13, 2018 11:51 am

Horsefly wrote:
Fri Jul 13, 2018 10:36 am
One Ping wrote:
Fri Jul 13, 2018 10:26 am
Hayden wrote:
Fri Jul 13, 2018 10:24 am
Also, remember that NIIT kicks in at $250,000 for married. Personally, I am converting up to the point where NIIT starts.
Not to NIIT pick but what is NIIT.
NIIT = Net Investment Income Tax

However, I thought that IRA distributions where exempt from NIIT. I need to go look....

EDIT: As far as I can tell, IRA distributions are NOT subject to NIIT.
True, but if you are over the NIIT level, that makes your dividends and capital gains subject to NIIT.

For example, let's say I am single, with 50,000 in dividends and 150,000 in Roth conversions. I don't pay NIIT. But if I do 160,000 in Roth conversions, now I pay NIIT on 10,000.

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One Ping
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Re: massive Roth conversion

Post by One Ping » Fri Jul 13, 2018 12:16 pm

Horsefly wrote:
Fri Jul 13, 2018 10:36 am
One Ping wrote:
Fri Jul 13, 2018 10:26 am
Hayden wrote:
Fri Jul 13, 2018 10:24 am
Also, remember that NIIT kicks in at $250,000 for married. Personally, I am converting up to the point where NIIT starts.
Not to NIIT pick but what is NIIT.
NIIT = Net Investment Income Tax

However, I thought that IRA distributions where exempt from NIIT. I need to go look....

EDIT: As far as I can tell, IRA distributions are NOT subject to NIIT.
Thanks.
"Re-verify our range to target ... one ping only."

kaneohe
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Re: massive Roth conversion

Post by kaneohe » Fri Jul 13, 2018 12:29 pm

GAAP wrote:
Fri Jul 13, 2018 9:39 am
...............................................................

..................................................................

Another consideration would be whether or not you wish to make Roth contributions, since the phase-out limits would limit how much you can convert.
I thought that the MAGI subtracts out the Roth conversion amounts from AGI so that MAGI would be unaffected by those amounts.

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FIREchief
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Re: massive Roth conversion

Post by FIREchief » Fri Jul 13, 2018 1:59 pm

kaneohe wrote:
Fri Jul 13, 2018 12:29 pm
GAAP wrote:
Fri Jul 13, 2018 9:39 am
...............................................................

..................................................................

Another consideration would be whether or not you wish to make Roth contributions, since the phase-out limits would limit how much you can convert.
I thought that the MAGI subtracts out the Roth conversion amounts from AGI so that MAGI would be unaffected by those amounts.
I don't believe that MAGI subtracts out income from Roth conversions, but there is a worksheet in the instructions that allows you to subtract Roth conversion income before applying the phase-out thresholds for Roth contribution eligibility.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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One Ping
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Re: massive Roth conversion

Post by One Ping » Fri Jul 13, 2018 2:14 pm

kaneohe wrote:
Fri Jul 13, 2018 12:29 pm
I thought that the MAGI subtracts out the Roth conversion amounts from AGI so that MAGI would be unaffected by those amounts.
Nope. MAGI = AGI (Adjusted Gross Income, which includes the taxable part of any Roth Conversion) + Tax-Exempt Interest.
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Dottie57
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Re: massive Roth conversion

Post by Dottie57 » Fri Jul 13, 2018 2:23 pm

BigFoot48 wrote:
Fri Jul 13, 2018 10:22 am
Put your numbers in the Retiree Portfolio Model to get an estimate of what the gutting might be during conversions, or after 70 during RMD years. It now includes an estimate of the impact of high income on Medicare premiums.
Will this run on Mac which does not have Visual Basic for applications?

123
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Re: massive Roth conversion

Post by 123 » Fri Jul 13, 2018 2:56 pm

From my perspective the older you are the less valuable Roth conversions become because you have fewer years to take advantage of the tax-free gains (assuming the conversion is not for estate purposes to potentially pass the Roth proceeds to someone in a higher tax bracket). Another "Less bang for the buck" circumstance is that older investors generally have more conservative portfolios so the "return" on the assets converted to Roth accounts will generally be lower versus had they converted at a younger age.
The closest helping hand is at the end of your own arm.

GAAP
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Re: massive Roth conversion

Post by GAAP » Fri Jul 13, 2018 3:09 pm

123 wrote:
Fri Jul 13, 2018 2:56 pm
From my perspective the older you are the less valuable Roth conversions become because you have fewer years to take advantage of the tax-free gains (assuming the conversion is not for estate purposes to potentially pass the Roth proceeds to someone in a higher tax bracket). Another "Less bang for the buck" circumstance is that older investors generally have more conservative portfolios so the "return" on the assets converted to Roth accounts will generally be lower versus had they converted at a younger age.
If you happen to live in a state with estate (death) taxes, there are also potential benefits for your heirs.

Less valuable may still matter if your income is barely sufficient. In that case, it can even make sense to convert money you plan to withdraw in the same year -- just to get that little bit of tax-free gain during the year.

As you age, there is certainly less time to benefit from compounding, regardless of the portfolio composition. If it makes sense for one year, it makes sense for 5, 10, or 50 years.

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FIREchief
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Re: massive Roth conversion

Post by FIREchief » Fri Jul 13, 2018 3:12 pm

123 wrote:
Fri Jul 13, 2018 2:56 pm
From my perspective the older you are the less valuable Roth conversions become because you have fewer years to take advantage of the tax-free gains (assuming the conversion is not for estate purposes to potentially pass the Roth proceeds to someone in a higher tax bracket).
I would suggest that it also depends on whether or not you plan to spend all your money, or to leave some to heirs.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

GAAP
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Re: massive Roth conversion

Post by GAAP » Fri Jul 13, 2018 3:29 pm

One Ping wrote:
Fri Jul 13, 2018 2:14 pm
kaneohe wrote:
Fri Jul 13, 2018 12:29 pm
I thought that the MAGI subtracts out the Roth conversion amounts from AGI so that MAGI would be unaffected by those amounts.
Nope. MAGI = AGI (Adjusted Gross Income, which includes the taxable part of any Roth Conversion) + Tax-Exempt Interest.
I was wrong about the phase-out limits. Checking the IRS Publication 590-A, I found these instructions:
Worksheet 2-1. Modified Adjusted Gross Income for Roth IRA Purposes



Use this worksheet to figure your modified adjusted gross income for Roth IRA purposes.


1. Enter your adjusted gross income from Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37
2. Enter any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA (included on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b) and a rollover from a qualified retirement plan to a Roth IRA (included on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b)
3. Subtract line 2 from line 1

4. Enter any traditional IRA deduction from Form 1040, line 32; Form 1040A, line 17; or Form 1040NR, line 32
5. Enter any student loan interest deduction from Form 1040, line 33; Form 1040A, line 18; or Form 1040NR, line 33
6. Enter any domestic production activities deduction from Form 1040, line 35, or Form 1040NR, line 34
7. Enter any foreign earned income exclusion and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18
8. Enter any foreign housing deduction from Form 2555, line 50
9. Enter any excludable qualified savings bond interest from Form 8815, line 14
10. Enter any excluded employer-provided adoption benefits from Form 8839, line 28
11. Add the amounts on lines 3 through 10
12. Enter:

$196,000 if married filing jointly or qualifying widow(er),

$10,000 if married filing separately and you lived with your spouse at any time during the year, or

$133,000 for all others


Is the amount on line 11 more than the amount on line 12?
If yes, see the Note below.
If no, the amount on line 11 is your modified adjusted gross income for Roth IRA purposes.
Note. If the amount on line 11 is more than the amount on line 12 and you have other income or loss items, such as social security income or passive activity losses, that are subject to AGI-based phaseouts, you can refigure your AGI solely for the purpose of figuring your modified AGI for Roth IRA purposes. (If you receive social security benefits, use Worksheet 1 in Appendix B to refigure your AGI.) Then go to line 3 above in this Worksheet 2-1 to refigure your modified AGI. If you don’t have other income or loss items subject to AGI-based phaseouts, your modified adjusted gross income for Roth IRA purposes is the amount on line 11 above.
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VictoriaF
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Re: massive Roth conversion

Post by VictoriaF » Fri Jul 13, 2018 3:50 pm

Wild Willie wrote:
Fri Jul 13, 2018 8:56 am
Had a thought and as my wife always says, "when you have a thought, I start worrying".
According to a relationships expert Dr. Gottman, contempt is the biggest predictor of divorce, https://www.gottman.com/blog/this-one-t ... f-divorce/ .
Wild Willie wrote:
Fri Jul 13, 2018 8:56 am
Wondering if there is any magic bullet anyone knows about regarding converting a $1M+ Tira to Roth's and not get gutted by the IRS? Is there anyway to defer the tax bill other than spacing out the conversion amounts? Then there is the extra Medicare premiums if I have too much taxable income in one year. Just looking for some tips (if there are any).
If you move to a state without a state income tax, you will save state income tax on the Roth conversion.

Victoria
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BigFoot48
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Re: massive Roth conversion

Post by BigFoot48 » Fri Jul 13, 2018 5:34 pm

Dottie57 wrote:
Fri Jul 13, 2018 2:23 pm

Will this run on Mac which does not have Visual Basic for applications?
Sorry, but I don't know, but the model can be used without the Visual Basic macros which are just used for navigating and clearing entries.
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Dottie57
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Re: massive Roth conversion

Post by Dottie57 » Fri Jul 13, 2018 5:56 pm

BigFoot48 wrote:
Fri Jul 13, 2018 5:34 pm
Dottie57 wrote:
Fri Jul 13, 2018 2:23 pm

Will this run on Mac which does not have Visual Basic for applications?
Sorry, but I don't know, but the model can be used without the Visual Basic macros which are just used for navigating and clearing entries.
Thanks! I think I would need to get a low cost windows computer in order to use many of the many spreadsheets which exist.

SuzBanyan
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Re: massive Roth conversion

Post by SuzBanyan » Fri Jul 13, 2018 6:06 pm

Thanks to those posting that MAGI for Roth contribution limits is determined based on AGI minus income from tIRA conversions to Roth. I was not aware of this and now have one less threshold to balance when looking a Roth conversions; IRMAA and tax brackets are more than enough to bogle my mind.

As an aside, just looking at Pub 590-A makes me realize how time consuming it will be for the IRS to conform the instructions to the changes in the new “postcard” form 1040.

kaneohe
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Re: massive Roth conversion

Post by kaneohe » Fri Jul 13, 2018 8:09 pm

One Ping wrote:
Fri Jul 13, 2018 2:14 pm
kaneohe wrote:
Fri Jul 13, 2018 12:29 pm
I thought that the MAGI subtracts out the Roth conversion amounts from AGI so that MAGI would be unaffected by those amounts.
Nope. MAGI = AGI (Adjusted Gross Income, which includes the taxable part of any Roth Conversion) + Tax-Exempt Interest.
Many kinds of MAGI inhabit this world.......this one looks like the Medicare IRMAA one, not the Roth contribution limit one.

airstreamer2008
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Re: massive Roth conversion

Post by airstreamer2008 » Fri Jul 13, 2018 10:40 pm

I saw that you are 50 years old. Have you begun to consider how and what you want to donate to charities? A friend of mine, CPA retired, told me about QCD or qualified charitable deductions that you make BEFORE AGI; best to check it out: Who can make a qualified charitable distribution? An individual donor can contribute up to $100,000 per year in QCDs, as long as that individual is 70½ years old or older. For married couples, each spouse can make QCDs up to the $100,000 limit for a potential total of $200,000. Here is a link to a brief discussion: https://www.kitces.com/blog/qualified-c ... uirements/ I'm thinking of doing a QCD after I consult a tax accountant.

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One Ping
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Re: massive Roth conversion

Post by One Ping » Fri Jul 13, 2018 11:37 pm

kaneohe wrote:
Fri Jul 13, 2018 8:09 pm
One Ping wrote:
Fri Jul 13, 2018 2:14 pm
kaneohe wrote:
Fri Jul 13, 2018 12:29 pm
I thought that the MAGI subtracts out the Roth conversion amounts from AGI so that MAGI would be unaffected by those amounts.
Nope. MAGI = AGI (Adjusted Gross Income, which includes the taxable part of any Roth Conversion) + Tax-Exempt Interest.
Many kinds of MAGI inhabit this world.......this one looks like the Medicare IRMAA one, not the Roth contribution limit one.
Yup, agree, and Medicare MAGI was the intent of my comment upthread when the discussion was about converting to the top of the 24% bracket.
viewtopic.php?f=1&t=253864&newpost=4019 ... d#p4018069
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The Wizard
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Re: massive Roth conversion

Post by The Wizard » Sat Jul 14, 2018 3:28 am

123 wrote:
Fri Jul 13, 2018 2:56 pm
From my perspective the older you are the less valuable Roth conversions become because you have fewer years to take advantage of the tax-free gains (assuming the conversion is not for estate purposes to potentially pass the Roth proceeds to someone in a higher tax bracket). Another "Less bang for the buck" circumstance is that older investors generally have more conservative portfolios so the "return" on the assets converted to Roth accounts will generally be lower versus had they converted at a younger age.
I tend to agree.
I do moderate Roth conversions and will cease doing them when I turn 70 in 2020.
I ignore tax brackets and base my Roth conversion amounts on expected AGI at age 70+, tempered by IRMAA considerations.

As an example, let's say your AGI this year, as a single person, is $110,000 before doing any Roth conversion and you are age 63 or older.
This means you're just over the $107,000 IRMAA tier threshold with the next threshold being $133,500.
So maybe do $20k to $22k of Roth conversions this year to get up close to but not over that $133,500 level...
Attempted new signature...

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Cyclesafe
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Re: massive Roth conversion

Post by Cyclesafe » Sat Jul 14, 2018 8:33 am

Run TurboTax (even 2017's) to check if your intended conversion attracts NIIT. There are two separate tests for NIIT: one MAGI and the other net investment income. Conversions are an element of MAGI (but not net investment income). To the extent your MAGI is over your NIIT exclusion, ALL net investment income that takes you over the limit is subject to NIIT. I think this is intentionally confusing.

Run your own numbers to be certain. For me, incremental conversions attract 3.8% NIIT.

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siamond
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Re: massive Roth conversion

Post by siamond » Sat Jul 14, 2018 8:35 am

Wild Willie wrote:
Fri Jul 13, 2018 8:56 am
Wondering if there is any magic bullet anyone knows about regarding converting a $1M+ Tira to Roth's and not get gutted by the IRS?
Well, there is a magic bullet of sorts, but either you have it or you don't... If you happen to have a sizable taxable account in addition to your tIRA, then you can early retire, use your taxable account for living expenses without paying (Federal) taxes if you stay in the 0% bracket for long term capital gains, and Roth-convert sizable amounts every year while staying in a low tax bracket. This is exactly what I am doing, and this is truly magical! Just beware of those state taxes though, which can suddenly become more significant than you might have expected, depending on where you live.

For married-filing-jointly, the 0% bracket goes to $77,200 capital gains. And those are capital gains, hence less than the money you actually withdraw (cf. cost basis).

GAAP
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Re: massive Roth conversion

Post by GAAP » Sat Jul 14, 2018 9:36 am

siamond wrote:
Sat Jul 14, 2018 8:35 am
Wild Willie wrote:
Fri Jul 13, 2018 8:56 am
Wondering if there is any magic bullet anyone knows about regarding converting a $1M+ Tira to Roth's and not get gutted by the IRS?
Well, there is a magic bullet of sorts, but either you have it or you don't... If you happen to have a sizable taxable account in addition to your tIRA, then you can early retire, use your taxable account for living expenses without paying (Federal) taxes if you stay in the 0% bracket for long term capital gains, and Roth-convert sizable amounts every year while staying in a low tax bracket. This is exactly what I am doing, and this is truly magical! Just beware of those state taxes though, which can suddenly become more significant than you might have expected, depending on where you live.

For married-filing-jointly, the 0% bracket goes to $77,200 capital gains. And those are capital gains, hence less than the money you actually withdraw (cf. cost basis).
A HECM LOC could also help you do this -- if you're at least 62 and have significant equity in your home.

Parthenon
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Re: massive Roth conversion

Post by Parthenon » Sat Jul 14, 2018 10:19 am

airstreamer2008 wrote:
Fri Jul 13, 2018 10:40 pm
I saw that you are 50 years old. Have you begun to consider how and what you want to donate to charities? A friend of mine, CPA retired, told me about QCD or qualified charitable deductions that you make BEFORE AGI; best to check it out: Who can make a qualified charitable distribution? An individual donor can contribute up to $100,000 per year in QCDs, as long as that individual is 70½ years old or older. For married couples, each spouse can make QCDs up to the $100,000 limit for a potential total of $200,000. Here is a link to a brief discussion: https://www.kitces.com/blog/qualified-c ... uirements/ I'm thinking of doing a QCD after I consult a tax accountant.
+1

I retired at 53 and started rolling over Traditional IRA dollars to a Roth while staying in the 15% federal tax bracket. At 70.5 I stopped doing that so I could fill out my charitable donation budget using money from the Traditional IRA as a Qualified Charitable Distribution. The amount left will probably be just right for future donations depending of course on how long I live.

Ed
"What am I gonna do if I run out of money?"

randomguy
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Re: massive Roth conversion

Post by randomguy » Sat Jul 14, 2018 12:18 pm

123 wrote:
Fri Jul 13, 2018 2:56 pm
From my perspective the older you are the less valuable Roth conversions become because you have fewer years to take advantage of the tax-free gains (assuming the conversion is not for estate purposes to potentially pass the Roth proceeds to someone in a higher tax bracket). Another "Less bang for the buck" circumstance is that older investors generally have more conservative portfolios so the "return" on the assets converted to Roth accounts will generally be lower versus had they converted at a younger age.
The purpose of the ROTH conversion isn't to get tax free gains.
a) 100k in tIRA. Take it out at 25%(make math easy:)) invest that 75k in a fund that doubles : 150k spendable money
b) 100k in tIRA. Let it double in value: 200k. Now pay 25% = 150k
Your in the same spot. For one to win out over the other you need some manipulation of the tax rates. There are a bunch of common ways (SS taxation, moving states, SS taxation, death of a spouse, medicare irmaa,....) for this number to bounce around a bit during retirement even if your income level is about the same. In the end you are making some guesses and hoping things work out. There are outside factors like RMDs and final usage of the money that can also tilt which one you prefer.

randomguy
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Re: massive Roth conversion

Post by randomguy » Sat Jul 14, 2018 12:29 pm

siamond wrote:
Sat Jul 14, 2018 8:35 am
Wild Willie wrote:
Fri Jul 13, 2018 8:56 am
Wondering if there is any magic bullet anyone knows about regarding converting a $1M+ Tira to Roth's and not get gutted by the IRS?
Well, there is a magic bullet of sorts, but either you have it or you don't... If you happen to have a sizable taxable account in addition to your tIRA, then you can early retire, use your taxable account for living expenses without paying (Federal) taxes if you stay in the 0% bracket for long term capital gains, and Roth-convert sizable amounts every year while staying in a low tax bracket. This is exactly what I am doing, and this is truly magical! Just beware of those state taxes though, which can suddenly become more significant than you might have expected, depending on where you live.

For married-filing-jointly, the 0% bracket goes to $77,200 capital gains. And those are capital gains, hence less than the money you actually withdraw (cf. cost basis).
Problem is it doesn't work. Take a 1 million dollar account making 5%, take out 20k/year and see where you are in 10-20 years.:) With large tIRAs, you are going to pay taxes of some sort. You just have to try and minimize them.

WannabeBogleHead01
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Re: massive Roth conversion

Post by WannabeBogleHead01 » Sat Jul 14, 2018 2:02 pm

I hope I’m not jacking this thread, but I thought one of the more valuable reasons of converting to Roth (for a MFJ household) was to lower eventual RMD’s, so that when the first person passes, the second isn’t forced into a much higher tax bracket. Is that still a correct assumption?

Horsefly
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Re: massive Roth conversion

Post by Horsefly » Sat Jul 14, 2018 2:10 pm

WannabeBogleHead01 wrote:
Sat Jul 14, 2018 2:02 pm
I hope I’m not jacking this thread, but I thought one of the more valuable reasons of converting to Roth (for a MFJ household) was to lower eventual RMD’s, so that when the first person passes, the second isn’t forced into a much higher tax bracket. Is that still a correct assumption?
Yes. That's certainly why I'm doing them. We can't tell where tax rates will be, but if they go back to where they were in 2017, our RMDs will put us into a higher tax bracket than we are in today, even with doing big Roth conversions. So I do the Roth conversion, pay lower taxes now, knowing that when I take the money out of the Roth 10 years or more from now, I won't pay any taxes.

I will say, this discussion of doing $1M conversion is harder for me to make sense of, unless someone has a really large (>$10M) tIRA.

danaht
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Re: massive Roth conversion

Post by danaht » Sat Jul 14, 2018 2:11 pm

GAAP wrote:
Fri Jul 13, 2018 9:39 am
Another consideration would be whether or not you wish to make Roth contributions, since the phase-out limits would limit how much you can convert.
:confused ... It is my understanding that a Roth conversion has no effect on how much you can contribute to a Roth - since Roth IRA conversions are not included in your modified adjusted gross income when determining whether you're eligible to make a Roth IRA contribution.

Silk McCue
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Re: massive Roth conversion

Post by Silk McCue » Sat Jul 14, 2018 2:15 pm

WannabeBogleHead01 wrote:
Sat Jul 14, 2018 2:02 pm
I hope I’m not jacking this thread, but I thought one of the more valuable reasons of converting to Roth (for a MFJ household) was to lower eventual RMD’s, so that when the first person passes, the second isn’t forced into a much higher tax bracket. Is that still a correct assumption?
This was referenced just a few posts above regarding considerations.

viewtopic.php?f=1&t=253864&p=4019963#p4019814

It's all individual. Once one of us passes while we are taking Social Security at 70 (quite a while from now) a COLA'd pension along with Social Security by themselves will likely push the other almost all the way through the Hump at 40.7% before dropping back on all subsequent dollars taxed at 22%. Absolutely nothing that can be done about that in our case. As along as we are both alive our Roth conversion strategy will allow us to pay 0% taxes on IRA withdrawals because they will all be taken as QCD's.

Cheers

Dottie57
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Re: massive Roth conversion

Post by Dottie57 » Sat Jul 14, 2018 2:40 pm

The Wizard wrote:
Sat Jul 14, 2018 3:28 am
123 wrote:
Fri Jul 13, 2018 2:56 pm
From my perspective the older you are the less valuable Roth conversions become because you have fewer years to take advantage of the tax-free gains (assuming the conversion is not for estate purposes to potentially pass the Roth proceeds to someone in a higher tax bracket). Another "Less bang for the buck" circumstance is that older investors generally have more conservative portfolios so the "return" on the assets converted to Roth accounts will generally be lower versus had they converted at a younger age.
I tend to agree.
I do moderate Roth conversions and will cease doing them when I turn 70 in 2020.
I ignore tax brackets and base my Roth conversion amounts on expected AGI at age 70+, tempered by IRMAA considerations.

As an example, let's say your AGI this year, as a single person, is $110,000 before doing any Roth conversion and you are age 63 or older.
This means you're just over the $107,000 IRMAA tier threshold with the next threshold being $133,500.
So maybe do $20k to $22k of Roth conversions this year to get up close to but not over that $133,500 level...
I’ve been.ooking at doing Roth conversions starting of about 100k At 62. At current tax rates, I think I could convert tIRA completely. This would give me quite a few years To convert at lower rates. I haven’t run good calls to see what the limit of conversions should be.

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siamond
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Re: massive Roth conversion

Post by siamond » Sat Jul 14, 2018 2:49 pm

randomguy wrote:
Sat Jul 14, 2018 12:29 pm
siamond wrote:
Sat Jul 14, 2018 8:35 am
Wild Willie wrote:
Fri Jul 13, 2018 8:56 am
Wondering if there is any magic bullet anyone knows about regarding converting a $1M+ Tira to Roth's and not get gutted by the IRS?
Well, there is a magic bullet of sorts, but either you have it or you don't... If you happen to have a sizable taxable account in addition to your tIRA, then you can early retire, use your taxable account for living expenses without paying (Federal) taxes if you stay in the 0% bracket for long term capital gains, and Roth-convert sizable amounts every year while staying in a low tax bracket. This is exactly what I am doing, and this is truly magical! Just beware of those state taxes though, which can suddenly become more significant than you might have expected, depending on where you live.

For married-filing-jointly, the 0% bracket goes to $77,200 capital gains. And those are capital gains, hence less than the money you actually withdraw (cf. cost basis).
Problem is it doesn't work. Take a 1 million dollar account making 5%, take out 20k/year and see where you are in 10-20 years.:) With large tIRAs, you are going to pay taxes of some sort. You just have to try and minimize them.
Well, yes, it is a minimization play, but as such, it works pretty darn well. I started using this strategy in the past couple of years, and will continue for roughly 15 years. I do convert more than $20k at time, mind you, thanks to the cost basis aspect. Don't forget that there is little point converting ALL of the tIRA, and that all amounts in the equation (including tax brackets) will change over time. You just need to reach a point where RMDs will not create undesirable taxes down the road. So yes, it is a minimization play, but I still find it pretty magical after decades of being hammered left & right by high brackets taxes, AMT and all that jazz. Now you do need to be in this sweet spot where it all adds up for it to work well. I happen to be, but I am keenly aware of the fact that few people are.

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changingtimes
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Re: massive Roth conversion

Post by changingtimes » Mon Nov 12, 2018 4:10 pm

Silk McCue wrote:
Sat Jul 14, 2018 2:15 pm
WannabeBogleHead01 wrote:
Sat Jul 14, 2018 2:02 pm
I hope I’m not jacking this thread, but I thought one of the more valuable reasons of converting to Roth (for a MFJ household) was to lower eventual RMD’s, so that when the first person passes, the second isn’t forced into a much higher tax bracket. Is that still a correct assumption?
This was referenced just a few posts above regarding considerations.

viewtopic.php?f=1&t=253864&p=4019963#p4019814

It's all individual. Once one of us passes while we are taking Social Security at 70 (quite a while from now) a COLA'd pension along with Social Security by themselves will likely push the other almost all the way through the Hump at 40.7% before dropping back on all subsequent dollars taxed at 22%. Absolutely nothing that can be done about that in our case. As along as we are both alive our Roth conversion strategy will allow us to pay 0% taxes on IRA withdrawals because they will all be taken as QCD's.

Cheers
It's certainly what's in the cards for me. Two (non COLA'ed) pensions, planning on survivor SS at 60 to maximize my SS at 70, DH's 401k that is now an inherited IRA, my own 401k, a likely inheritance from a parent, and a much lower spending rate as a widow has me looking at six-figure RMDs while barely needing any of it. (and no direct heirs) Yes, QCDs, etc., etc., but still, it's why I have already started doing conversions while still working, in the 22% bracket, and will ramp it up during years of lower income.

On the bright side, maybe I'll be able to afford a Ritz Carlton-level nursing home. :)

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